Undersea & Outer Space – Risk & Reward

For those of you who would prefer to listen:

Retail sales declined 0.8% in January. That was much worse than the 0.1% decline expected. It was a notable slide from December’s 0.4% monthly increase. After a strong Holiday spending season, a slowdown in January is pretty customary. This one was obviously bigger. Building materials and supplies saw the biggest decline, down 4.1% in January. Furniture sales grew. Bars and restaurants continue to see increases. That’s been a consistent theme. Americans have been out and about with a vengeance. Covid triggered the fierce rebound in activity and consumption. It hasn’t slowed.

The US Economy remains strong. Consumers keep spending. Expectations for a recession in 2024 have pretty much evaporated on Wall Street. That said, it was a perceived certainty to happen in 2023. High inflation and rising interest rates were expected to be the drivers. Clearly, the recession never showed up. The Street tends to forecast by chase. It’s really altogether not that helpful. It hasn’t paid to underestimate the resiliency of the American Economy. The Market has certainly reflected the strength.

It’s different overseas. Japan and the United Kingdom are in recession. In fact, Japan’s economic contraction resulted in losing its status as the 3rd largest economic power. They swapped places with Germany. Rising rates crushed British homeowners. Unlike in the US, British mortgages generally term out every 2-5 years. Locking in low rates never lasts. Pain was felt as the price of money spiked. Consumers have been pinched across the pond. The European Union already cut its outlook for 2024. Inflation is still an issue. Price increases have slowed considerably. But they’re still increasing. Prices are not coming down. We consumers are paying those prices. 

Worldwide shipping is undergoing major changes in the wake of continuous attacks by the Iranian-backed Houthi rebels in the Red Sea. Freedom of navigation and the free flow of commerce have been devastated. The Suez Canal used to see nearly 20% of global commercial shipping traffic on a daily basis. It isn’t anymore.

Maersk, one of the largest shipping companies in the world, has stopped sending vessels through the Red Sea. It isn’t worth it. The company has re-routed their ships around the tip of Africa. The longer route takes an additional 10-12 days, each way, for cargo to arrive. That means higher fuel costs as well as increased expenses for labor and insurance, among others. Shippers see no other choice but to keep their crew and cargo safe as the Red Sea attacks continue. Maersk management says it will take time to restore confidence. It’s inflationary. Shipping rates have doubled in response. Increased costs get passed on. Consumers always pick up the tab.

The United States and the United Kingdom have responded with military activity intended to put an end to the violence in the Red Sea. They’ve launched retaliatory attacks of their own. Russia and China accuse the US and UK of illegally attacking targets in Yemen at the United Nations Security Council. China has suffered economically from the shipping crisis. Chinese exports to Europe have been impacted greatly. The Chinese Economy has been weak. Its people are not happy. China is trying to show strength on the world stage in hopes of fueling patriotism while it faces its economic challenges.

Another risk: Vulnerable infrastructure. Pipelines have been cutoff in response to the Russian invasion of Ukraine. We saw what happened to oil and gas supplies in Europe. There’s a new threat; Undersea cables being cutoff. It’s been reported that the Houthi rebels are moving their attention from shipping to the internet. There are concerns they could cut undersea internet cables off the country’s Red Sea coast. The Houthi goal would divert global disruption to information from stuff. It’s far from clear whether they have the capability to do this. There’s a big gap between desire and doing.

The Asia-Africa-Europe-1 internet cable travels 15,500 miles along the ocean floor. It spans from the South China Sea to the Mediterranean, connecting Hong Kong to France. It goes straight through the Red Sea. The cable helps provide internet connections to billions of people in over a dozen countries. It shows how fragile internet infrastructure can be. Nearly 20% of global internet traffic travels through cables under the Red Sea.

The internet is often described as a spaghetti-work of really long wires. The vast majority of global data travels undersea. There are nearly 600 undersea network cables carrying data throughout the Earth’s oceans. 99% of all internet traffic travel through them. It is believed that Google, Facebook, Amazon and Microsoft own or lease half of the cables. These cables tend to have an average lifespan of 25 years.

Laying the cables is critical work that requires precision. The cables need to be run across flat surfaces of the ocean floor. They have to avoid coral reefs, sunken ships, fish beds, and other ecological habitats. Undersea cables were first rolled out in the mid-19th century. In 1854, installation began on the first Trans-Atlantic telegraph cable. 4 years later, two steam-powered ships met in the middle of the Atlantic Ocean. They connected two ends of a 2,500-mile-long cable linking for the first time the European and North American continents by telegraph. The cables linked Newfoundland and Ireland. That was before Abraham Lincoln was President, for perspective.

I wrote about this in The Summer of 2020, back when I was writing those daily pieces. Here’s the link to that piece if you’re interested in seeing it again: https://bedellfrazier.com/somewhere-beyond-the-sea/

Are satellites the solution? Ultimately, the answer sounds like yes. It’s still way early days. Global internet traffic from Elon Musk’s Starlink satellites nearly tripled last year. US traffic from Starlink grew by more than 150%. Competition is building. Amazon is getting involved in Satellite communications with its Project Kuiper. Investments are being made. That said, satellite still accounts for just 1% of daily internet traffic. But it’s connecting people in regions of the world who previously haven’t had access.

Space is clearly the final frontier. It needs to remain a peaceful domain. China and Russia threaten that. News broke this week from Capitol Hill that Russia has nuclear weapon capabilities in space and plans to use it. That would be a serious national security threat. The White House did confirm reports of Russia developing a space-based “anti-satellite capability.” It also said there was no imminent threat. Leaders in NATO have been sounding the alarm of late on Russian aggression and reports of opposition leader Navalny’s death in prison fuels the fear of the Russian threat. Bad actors act bad. We must always remain vigilant when it comes to network security.

Back to the Market:

The S&P hit a fresh, all-time high this week. It closed Friday in the red, but still held the 5K milestone level. The Stock Market just missed being up 15 of the last 16 weeks. It’s basically gone straight up since the October lows. That hasn’t happened very often. Small Caps joined the party again, though continue to prove very volatile. The rally broadened out a bit. But leadership remains quite narrow. There’s also this: The strength in the sell-off on Tuesday was much greater than the rebound was the rest of the week. That caught our attention. We’re studying things closely. The fact is, the Stock Market has been incredibly strong and resilient. How long it lasts is everyone’s question.

Earnings Season has been solid, coming in pretty much as expected. The key is where we’re headed. Tech has been the dominant driver of growth for years. That trend remains. Artificial Intelligence has captured Corporate America’s wallet share for investment. It’s also ignited investor enthusiasm. The Tech Titans have reigned. Tech, in general, has dominated for a decade. That’s where the growth is. Artificial Intelligence is the next big thing. It represents exponential growth. That growth requires stable access to networks, both undersea and in outer space. Out there is both risk and reward.

No stock stands out as an AI winner more than Nvidia. The chip maker provides the tools and infrastructure for AI. Nvidia reports earnings next week. Nvidia’s quarterly report may matter more to the Market than the January inflation report. Up nearly 50% this young year alone, Nvidia’s stock has been a rocket ship. The company is now valued at $1.8 Trillion. It’s increased a whopping $550 Billion since December. It replaced both Alphabet and Amazon this week, becoming the 3rd largest company in America, behind just Microsoft and Apple. Nvidia alone has accounted for 35% of the S&P 500’s gains in 2024. That’s pretty remarkable for one company.

Investing is all about risk and reward. Life is about that too. Investors sure have been rewarded for risk-taking. Today risks are high. Stock prices are too. They’ve found a way to rise together. We know full well it doesn’t always happen. It sure has been nice to see green the last few months. We’ll be ready, if and when that changes.

Have a nice weekend. The Market will be closed Monday, in honor of Presidents Day. Our office will be closed too. We’ll be back, dark and early on Tuesday.

Mike

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